Swing Trading sits in the middle of the continuum between day trading and trend following. Swing traders hold a particular stock for a period of time, generally between a few days and two or three weeks, and trade the stock on the basis of the general upward or downward trends.
Swing Trading takes advantage of brief price swings in strongly trending stocks to ride the momentum in the direction of the trend and combines the best of two worlds - the slower pace of investing and the increased potential gains of day trading. Swing Trading is not high-speed day trading. Some people call it momentum investing, because you only hold positions that are making major moves. By rolling your money over rapidly through short term gains you can quickly build up your equity.
What are the (dis)advantages of Swing Trading?
Swing Trading combines the best of two worlds - the slower pace of investing and the increased potential gains of day trading. It works well for part-time traders - especially those doing it while at work. While day traders typically have to stay glued to their computers for hours at a time, feverishly watching minute-to-minute changes in quotes, Swing Trading doesn't require that type of focus and dedication.
Of course, the problem with both swing trading and long-term trend following is that success is based on correctly identifying what type of market is currently being experienced. Looking back over the past few years, trend following would have been the ideal strategy for the raging bull market of the last half of the 1990s, while swing trading probably would have been best for 2000 and 2001. With the 2002 bear market, the best strategy would have been to follow the trend and short everything in sight. As economists and traders would agree, the most accurate insight into trends is viewed in retrospect.
There is a risk that prices will break the channel and that swing traders buy or sell at the worst time; thus losing invested capital. The 'preservation of capital' as a paramount consideration across all trading, and also applies when Swing Trading. Other risks inherent in equities or financial instruments trading exist, such as market risk, sector risk, and company risk.
How does Swing Trading work?
The basic strategy of Swing Trading is to jump into strongly trending currencies after its period of consolidation or correction is complete. Strongly trending currencies often make a quick move after completing its correction which one can profit from.
It should be noted that in either of the two market extremes, the bear-market environment or bull market, swing trading proves to be a rather different challenge than in a market that is between these two extremes. In these extremes, even the most active stocks will not exhibit the same up-and-down oscillations that they would when indices are relatively stable for a few weeks or months. In a bear market or a bull market, momentum will generally carry stocks for a long period of time in one direction only, thereby ensuring that the best strategy will be to trade on the basis of the longer-term directional trend. The swing trader, therefore, is best positioned when markets are going nowhere—when indices rise for a couple of days and then decline for the next few days, only to repeat the same general pattern again and again. A couple of months might pass with major stocks and indices roughly the same as their original levels, but the swing trader has had many opportunities to catch the short terms movements up and down (sometimes within a channel).
So, swing traders are not looking to hit the home run with a single trade—they are not concerned about perfect timing to buy a stock exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they wait for the stock to hit its baseline and confirm its direction before they make their moves. The story gets more complicated when a stronger up-trend or down-trend is at play: the trader may paradoxically go long when the stock jumps below its EMA and wait for the stock to go back up in an uptrend, or he or she may short a stock that has stabbed above the EMA and wait for it to drop if the longer trend is down.
Swing Trading, while a good trading style for beginning traders, still offers significant profit potential for intermediate and advanced traders. Swing traders can realize sufficient rewards on their trades after a couple of days, which keep them motivated, but their long and short positions of several days are of ideal duration so as to not lead to distraction. By contrast, trend following offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but there are few traders with sufficient discipline to hold a position for that period of time without getting distracted. On the other hand, trading dozens of stocks per day (Day Trading) may just prove too great a white-knuckle ride for some, making Swing Trading the perfect medium between the extremes.